Retiring From Your Business: Sale, Family Transfer, Employee Sale or Wind-Down

Most owners spend years building a business and far less time planning how to leave it. When retirement arrives, the choice of exit route shapes how much you receive, how quickly you can step away, and what happens to your employees, customers and family.

This guide compares the four main routes for owners of BC businesses: a sale to a third party, a transfer to family, a sale to employees or managers, and an orderly wind-down. Most owners benefit from looking at all four before settling on one.

Start with what you want from the exit

Before comparing routes, be clear about your priorities. Owners usually weigh some mix of:

• the price, and whether you need it paid in full at closing;
• how soon you want to stop working, and whether you are willing to stay on for a transition period;
• keeping the business going for employees and customers;
• treating your children fairly, whether or not they work in the business; and
• the tax result, which can differ widely between routes.

Your answers often point to one route over the others. Whichever you choose, the business has to be ready for scrutiny. Our article on preparing your business for sale covers the record, contract and lease clean-up that should start one to three years ahead.

Option 1: Sell to an outside buyer

A sale to a competitor, investor or individual buyer can produce a strong price, but it usually brings the most scrutiny. The buyer will carry out due diligence, negotiate representations and warranties, and often ask for part of the price to be held back or paid later.

Key legal points include:

• Share sale or asset sale. Sellers often prefer to sell shares, partly for tax reasons, while buyers often prefer to buy assets to avoid inheriting unknown liabilities. The structure affects price, risk and tax.
• Your employees. Under section 97 of the Employment Standards Act, when all or part of a business is sold, employees' employment is treated as continuous for the purposes of the Act. The buyer takes on their service history, which often shapes negotiations.
• Your obligations after closing. Expect a non-competition clause, a transition period and, sometimes, an earn-out tied to future results.

Option 2: Transfer the business to family

Passing the business to a son, daughter or other relative keeps it in the family, but it raises questions a third-party sale does not:

• Fairness among children. If one child takes over and others do not, you will need to decide how to balance that through your will, insurance or other assets.
• Getting paid. Family buyers often cannot pay the full price up front. Transfers are commonly staged over several years or paired with a promissory note, which leaves you exposed if the business struggles.
• Control during the handover. A shareholders' agreement can set out decision-making, buy-sell terms and what happens if the relationship sours.
• Tax. Transfers between related people are subject to specific tax rules, and those rules have changed in recent years. Get current advice from your accountant before agreeing on a structure.

Because a family transfer overlaps with your estate plan, it should be designed together with your will and powers of attorney. Our article on estate planning for BC business owners explains how those documents work with the company's own records.

Option 3: Sell to employees or managers

A management buyout can suit a business that depends on a few key people who already know the customers and operations. The challenge is usually financing, so sellers often accept part of the price over time.

An employee ownership trust is a newer federal option. As the Canada Revenue Agency describes it, the trust holds shares of the corporation for the benefit of its employees, which allows employees to acquire the business without buying shares directly. The conditions are strict: among other things, after a qualifying transfer the seller must deal at arm's length with the business and the trust, and cannot keep a right or influence that would let them control it. Tax incentives connected with these trusts have also been the subject of recent federal changes, so confirm the current rules before relying on them.

Option 4: Wind the business down

If no buyer emerges, or the business depends on you personally, an orderly wind-down may be the practical choice. That usually means selling the equipment and inventory, collecting receivables, ending or assigning leases and contracts, and paying creditors.

Employees whose jobs end are generally entitled to written notice or compensation for length of service under section 63 of the Employment Standards Act, rising to a maximum of eight weeks' wages after eight years, unless an exception applies. Employment contracts and common law notice can require more.

Once a BC company has no assets and has paid or adequately provided for its liabilities, it can apply for voluntary dissolution under the Business Corporations Act. Under sections 314 and 316, that requires an ordinary resolution of the shareholders, an affidavit sworn by a director and kept in the records office, and an application filed with the registrar. A company that still has assets to distribute can instead liquidate under section 319, which requires a special resolution and the appointment of a liquidator.

Tax: plan early with your accountant

Tax often shapes which route makes sense. Depending on the structure, a share sale may let you claim the lifetime capital gains exemption if the shares qualify, and both family transfers and employee ownership trusts have their own rules. Several of these rules have changed in recent years. A lawyer and an accountant working together from the start can test the options before you commit to one.

When to start

For most owners, two to five years is a realistic planning window. That gives time to clean up records, develop successors, test the market and stage a family or employee transfer if needed. Starting early also leaves room to change course if your first choice does not work out.

Planning your exit? Compare your options before you choose

Our business purchase and sale lawyers can review your company records and agreements, compare exit routes with you and your accountant, and prepare the sale, transfer or wind-down documents. We can also coordinate the plan with your will and powers of attorney.

Call 604-259-2844 or send us a message to arrange a consultation at our Vancouver office.